Refinancing a Mortgage, But Paying it Off Early

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I’ve been doing a little math lately. Instead of looking at a 30 year mortgage by default, what would a 15 year mortgage payment look like? With rates breaking record lows every week (at least it seems every week), I’d be hard pressed not to at least be enticed by a sweet, juicy ridiculously low mortgage rate.

So when my lender, Chase, sent me a promotion recently, by FedEx no less, offering to reduce my 5.25 percent interest rate to 4.25 percent, no strings, no fees, no appraisal, no nothing, in what amounts to a no-cost refinancing, I was skeptical.

James was skeptical because, well, wouldn’t you be skeptical if someone was offering you something for nothing? Or was he really getting something for free?

At the time I received the offer, I was 10 years away from paying off my 15-year mortgage, and paying it off by 2020 is an important part of my family’s financial strategy. If I took the offer, my payoff date would move to 2025. Not good. I’d also be paying about $16,000 more in interest by extending the term of the loan by five years. Also not good.

That’s what most refinancers don’t think about—the reset number. They see a lower payment—which is good—but they don’t see the extra interest they’ll pay (in addition to the interest they’ve already paid) because the loan was, well…reset. Game over. Start again.

James quickly saw this hiccup and turned it to his advantage…

To still get rid of the loan in 10 years, I had to ignore the tempting lower monthly payment of $1,529 that the reduced interest rate (and lower loan amount than my original loan) gave me and continue to make my old payment of $2,171.

This is the line that banks will give you. Just keep making the “same” payment you were making and you’ll pay it off just as fast or faster. And just in case you hit a rough patch, you can pocket the “extra” payment you were making. How many people see that extra $300 or $400 (or more) and not be tempted to spend it? I’m totally in that boat.

Of course, James hits it right on…

The key, of course, is that I have to have the discipline to keep on making the higher payments.